The Year of Our Discontent
The political context is highly chaotic and non-linear. We have decided to take Syria as our starting point, which reverberates through domestic politics as well as the budding relationship with the EU. The war in Syria will not end soon, but Turkey will not dare to enter the country and watch with dismay as her allies are crushed in the Northwest and Syrian Kurds encircle her border. Reinvigorated by her alliance with Syrian Kurds and Russia, PKK is expected to mount a spring insurgency, which may infect Western cities, as well. We fear headline grabbing terror attacks may become endemic.
Peace talks in Cyprus are making better progress than we had predicted, but it is still difficult to imagine Greek Cypriots ratifying a final deal, which would delay opening of new chapters of EU accession. Turkey can easily reduce the flow of refugees to EU, but whether she has the will or trust is a question we can’t answer at this point. At home, the public is happy with AKP and Erdogan, but the party is showing signs of strain. With the Constitutional Commission now disbanded, Erdogan has the option of forcing a referendum vote on the Executive Presidency or calling early elections. What will he do? We construct three scenarios for the very near-term, assigning 30% to snap elections and 20% to a rebellion within the party.
Turkish economy has surprised with its resilience in 2015, with growth having likely finished the year at around 3.5%-4%, while markets had a relatively favorable start into 2016. But these headlines should not mislead. Underlying growth dynamics is weak and of low quality, while growth resilience largely owes to an accommodative monetary and fiscal stance, and to capital inflows that, albeit being sparse, made this affordable. We have doubts this can be sustained for yet another year, yielding 4%-ish growth, despite the minimum wage increase and stepped-up fiscal spending, and prefer to work with a 2.5%-3% growth forecast instead – for now.
After letting inflation slip for another year and further denting its credibility with constantly changing narratives, the CBRT is likely to remain on auto-pilot, killing time until the change of guard takes place in April.
The government has been earnestly talking up reforms and some initiatives are already underway. It should be given the benefit of the doubt, but formidable obstacles stand in the way of making significant and tangible progress.